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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
2016 LC CASE SUMMARIES Civil Judgment (2013) Lu Shang Zhong Zi No.89Shandong High People’s Court [China]
Abstracted by JIN Saibo and ZHAO Yingfu
Prior History: Bank of China Dongying Dongcheng Sub-Branch v. Dongying Huacheng ROEWE Automobile Sale and Service Co., Ltd. v. Dongying Huacheng ROEWE Automobile Sale and Service Co., Ltd. Civil Judgment (2012) Dong Shang Chu Zi No.72, Dongying Intermediate People’s Court [China]
Topics: Accessory Guarantee; Pledge Rights; Preferential Payments of Compensation
Type of Lawsuit: Creditor sued Debtor and Guarantors.
Parties: Appellant/Plaintiff – Bank of China Dongying Dongcheng Sub-Branch
Appellee/Defendant – Dongying Huacheng ROEWE Automobile Sale and Service Co., Ltd.
Co-Defendant – ZHANG Yu’e
Co-Defendant – BO Fei
Third Party – BA Songtao
Decision: ZUO Yuyong, Judge of Shandong High People’s Court, upheld the judgment of the trial court ordering the defendant to reimburse plaintiff the loan amount with interest and the co-defendants to bear the joint and several guarantee liability. Plaintiff’s other claims were rejected.
Rationale: To satisfy the requirement of using cash collateral as pledge, one must “specify” the collateral (i.e. to put the cash collateral into specific account) and the creditor must possess the cash collateral.
Article
Factual Summary: On or about 2 September 2011, plaintiff and defendant Huacheng ROEWE entered Line of Credit Agreement which provided that plaintiff agreed to offer Huacheng ROEWE line of credit in total amount of RMB12 million, RMB 7 million of which was in the form of short and middle-term liquidity loan. Plaintiff and Huacheng ROEWE then entered Liquidity Loan Contract covenanting that plaintiff lent RMB 7 million to Huacheng ROEWE to No.2247 account of the latter. The Contract also provided that the No.2247 account was specified account and could only be used to pay or receive the loan money.
On the same day, plaintiff entered a Maximum Amount Guarantee Contract with BO Fei and ZHANG Yu’e covenanting that BO Fei and ZHANG Yu’e shall provide guarantee to the extent of RMB 12 million for the Line of Credit Contract and all special agreements made before or after the Line of Credit Contract accordingly. On or about 13 September 2011, Dongcheng Sub-Branch transferred RMB 7 million to No.2247 account as loan to Huacheng ROEWE. Because Huacheng ROEWE was involved in major legal lawsuit, Dongcheng Sub-Branch noticed an early termination of loan and asked Huacheng ROEWE to pay the loan and interest.
On or about 10 July 2012, Dongcheng Sub-Branch and Huacheng ROEWE entered a Cash Collateral Pledge Agreement and a Confirmation of Cash Collateral Pledge, the latter covenanting that “from the date of entering this Confirmation, (we) shall transfer the cash collateral to the general account No.2247 and the cash collateral shall be frozen.” Dongcheng Sub-Branch claimed preferential payment of compensation according to the Confirmation.
The trial court ruled that firstly, the Line of Credit Agreement, Liquidity Loan Contract and the Maximum Amount Guarantee Contract were of the true intent of the parties without violating any laws or regulations of China and therefore were valid. As to the cash collateral pledge, the trial court ruled that to satisfy the requirement of cash collateral pledge, the cash collateral must be “specified” (such as put in special account, sealed account or cash collateral account). Also, the cash must be in possession of creditor. In the current case, the No.2247 account was a general account and was used only for the payment and/or reception of the loan. Therefore the cash collateral was not “specified”. Even if the No.2247 account could be seen as “cash collateral account”, the cash collateral did not transfer to creditor. In all, the pledge did not come into effect. Dongcheng Sub-Branch did not have the right of preferential payment of compensation towards the amount of RMB 7 million.
Dongcheng Sub-Branch appealed to Shandong High People’s Court which rejected its claim and upheld the judgment of the trial court. The appellate court ruled that “No.2247 account was specified account and could only be used to pay or receive the loan money” was not equal to “special account/cash collateral account” as regulated in Administrative Measures for the RMB Bank Settlement Accounts made and promulgated by the People’s Bank of China. The cash collateral was not “specified” and was not in possession of Dongcheng Sub-Branch. Therefore, Dongcheng Sub-Branch did not have the pledge right and could not claim preferential payment of compensation towards the RMB 7 million.
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